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The Bailout Playbook

Step 1:  Really, really screw up your industry beyond all hope of repair, while paying yourself a nice salary to do so

Step 2:  Claim to the world that your industry is unique and different, and failure of your company and/or industry will cause a chain reaction that will bring down the whole economy and cost the country many multiples of the bailout price tag

Advocates for the nation's automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Step 2 is obviously pulled off easier if either a) representatives from your industry run the Treasury department or b) the new President owes your unions big time for his recent victory in a critical state.  For those of you just trying to keep you small business afloat, don't try this at home.  No bailout will ever be forthcoming if you don't have the power to move electoral votes, but you should expect to pay for other people's bailouts.

Postscript:  This is funny:

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

I think if people still buy tickets on airlines that are operating out of chapter 11 (an item that has zero value if the company folds) then people will still buy cars.  This is so totally lame it is tremendously irritating.

Posted on November 12, 2008 at 10:16 PM | Permalink

Comments

GM is going to fail. Its immediate problem is cash flow and the treasury can prop that up. But it just postpones the crash.

There is no sense blaming GM management or denouncing them as dunces. They are bound by the past and beaten by a very bad economic collapse. We don't yet know how bad.

With UAW labor costs and other contractual and debt obligations GM, Ford, and Chrysler simply cannot match healthier opponents such as Toyota and Honda who also build in the US. It won't happen.

And management cannot reduce those costs. That can only be done in bankruptcy proceedings.

So the choice is to give GM money which will disappear or to let bankruptcy occur.

Bankruptcy is our legal method of salvaging what can be saved and attempting to continue operations that have a chance. It is the right venue.

Posted by: K | Nov 13, 2008 1:11:32 AM

I think if people still buy tickets on airlines that are operating out of chapter 11 (an item that has zero value if the company folds) then people will still buy cars. This is so totally lame it is tremendously irritating.
I'm surprised by the last remark. Certainly many people will still buy cars. But at the margin, where people are right on the verge of deciding to buy or not buy a car, this may in fact keep some of them from doing so. How big is this impact? I don't know. But it's likely not 0%. Of course, it's also likely not 100%.

Posted by: mjh | Nov 13, 2008 4:48:10 AM

There is no warranty on a airline ticket other than everybody hopes you arrive safely. Who wants to buy a Big 3 car without a warranty? If GM declares bankruptcy, where is the money to pay warranty claims on cars sold before or after the bankruptcy?

Posted by: Charlie B | Nov 13, 2008 5:44:09 AM

So they will buy from someone who is not about to go bankrupt. People will still buy cars. That does not justify propping up one company.

Posted by: Reformed Republican | Nov 13, 2008 7:15:13 AM

I am more careful with $30,000 purchases than with $300 ones. It is a very different thing buying a car and buying an airplane ticket. Having said that, I am against a bailout that does not address the viability of the company, and forcing them to build low (or no) margin cars that buyers may not want does not address their long-term viability. The point you dismiss is just that an auto company bankruptcy is not the same thing as an airline bankruptcy, and it will probably be riskier to the company.

Maybe the bailout should be Treasury financed Debtor-in-possession financing during the time in chapter 11.

Posted by: MattJ | Nov 13, 2008 7:26:24 AM

GM should be allowed to reorganize via bankruptcy. More cash won't solve the problems they have, just postpone the inevitable.

I don't see how consumer confidence in GM is different if they go chapter 11 vs. getting $50B from the US Govt. Seems like GM's long term solvency risk is just about equal either way.

Jeff

Posted by: Jeff | Nov 13, 2008 7:47:21 AM

Ummm... we're already not buying their cars because they suck (aside from some Cadillacs, which aren't really my taste). How does this change anything?

Posted by: ErikTheRed | Nov 13, 2008 11:01:10 AM

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.
.....
Buy every purchaser an independent extended warranty. Lots cheaper than a bailout.

And I am sure that customers want to buy from firms that are so well managed that they have to beg for money from Uncle Sam. Not.

Posted by: tomw | Nov 13, 2008 11:02:58 AM

One thing that invalidates the airline vs. automaker in Chapter 11 comparison is that government intervention (in the form of municipal airport ownership) provides airlines captive markets in their hub cities. Reformed Republican hit the nail on the head -- people will buy cars, just not from a Chapter 11 GM.

The other bit of analysis is that if one of the automakers goes into reorg, the others would have to follow to be competitive. This would cascade to the large Tier 1 suppliers like Lear; Visteon; and Delphi, which is already in Ch11. No suppliers would cripple the foreign transplants; which source many of their components locally.

There is one long term lessons to take away from this crisis, and that's the role government regulation played in creating it. Why did people buy SUVs? CAFE regulations demolished the large sedan/station wagon. Why can't the automakers resize their dealer networks? State franchise laws prohibit it. The list goes on: Low value "safety regulations" (the trunk handle release lever is one example), Congress not enforcing the commerce clause and letting states craft their own patchwork of requirements, EPA NOx low-sulfer diesel and particulate emissions requirements.

The regulatory overburden, long lead times, and high capital investment cost between the auto manufacturers and a service provider like an airline invalidate any comparisons between the two.

Posted by: Tim | Nov 13, 2008 12:37:55 PM

Tim 12:37
The regulatory overburden, long lead times, and high capital investment cost between the auto manufacturers and a service provider like an airline invalidate any comparisons between the two.
....
Sure sounds like the nuclear power industry, no?

Regulate and roadblock lawsuits, EPA 'regulations' at the whim of whomever happens to warm the chair.
The law means what I say it means.
Congress out of my wallet, and out of industries they have no business 'regulating'.
tom

Posted by: tomw | Nov 15, 2008 10:38:27 AM

I'm pretty sure that you do get a refund if your airline folds, so long as you made the purchase with a credit card. The credit company apparently holds on to the money until after the flight. Sorry to be vague, there's a post somewhere in Felix Salmon's archives.

Posted by: jdar5039 | Nov 23, 2008 7:55:29 PM

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